Matti Siemiatycki testifies before U.S House of Representatives
Geography & planning prof provides lessons from Canada on public-private partnerships
Matti Siemiatycki of the Department of Geography & Program in Planning was one of the distinguished witnesses invited to testify before the United States House of Representatives’ Committee on Transportation and Infrastructure this month. Siemiatycki shared his expertise on Canada’s experience with public-private partnerships (PPPs).
Chairman John J. Duncan, Jr. noted in opening remarks at the hearing that while the use of public-private partnerships in highway, transit and water systems in the U.S. is fairly recent, many other countries have a much more extensive history of partnering with the private sector to deliver infrastructure projects – including Canada.
“In fact, one of the leading countries is just to the north of us,” Duncan said. Over the last two decades, Canada has become one of the most advanced and active markets for public-private partnerships with more than 200 projects that are operational, under construction, or in procurement.
Matti Siemiatycki shared his insights on Canada’s success with A & S News.
Why is the U.S. looking to Canada for help with public-private partnerships (PPPs)?
Canada has an active marketplace and established track record of planning and delivering infrastructure PPPs. Our current approach goes back to the 2000s, and primarily involves hospitals and health care facilities, followed by transportation infrastructure, prisons and courthouses, waste and water treatment assets, and education buildings. On projects delivered since the mid 2000s, Canadian PPPs have a strong record of projects coming in on-time and on budget; and to date there have been few of the forced contract renegotiations, public buyouts of failing projects, or outright project bankruptcies that have occurred with PPPs globally.
(View Siemiatycki's testimony below.)
What are the main reasons for Canada’s success with PPPs?
The Canadian approach to PPPs has a number of specific characteristics that contribute to its success.
First, in Canadian PPPs, government retains a significant role in identifying project priorities, developing performance specifications for projects that meet the public interest, and typically owning the underlying asset throughout the operating concession period. As well, PPPs in Canada are not seen as a one-size-fits-all model: various models of partnership and concession bundling have been used depending on the characteristics of the project. This ranges from design-build-finance type contracts where all private investment is repaid following the substantial completion of construction, to design-build-finance-maintain and design-build-finance-operate-maintain type deals that include long-term concessions lasting anywhere from 25-50 years.
Second, Canadian jurisdictions have set up special agencies with the sole responsibility of evaluating the merits of PPPs for specific projects and procuring PPPs. These agencies are staffed with highly skilled procurement experts that have the experience to structure and manage complex deals. The agencies have also developed standardized procurement processes, bid documents and legal contracts that can speed up procurement and make the market more transparent, predictable and attractive to prospective bidders.
Third, PPPs are not being widely used as a way for cash-strapped governments to raise new money for much needed public infrastructure. Most PPPs in Canada do not include new user fees or other types of revenue-raising tools that can directly repay all of the private sector capital investment and operating costs on the project. This is even the case in the highway sector, where tolls have been common internationally. Rather PPPs are primarily a financing mechanism not a funding strategy, with initial private sector capital investment and operating costs repaid through government-sponsored availability payments. The continued public investment in PPP projects means that Canadian governments can use PPPs to deliver all types of infrastructure that meet the public interest, rather than only a narrower range of projects that are able to recover their own costs through user fees.
Finally, since Canadian PPPs are not primarily being driven by the objective of raising new private money for infrastructure, the leading motivation is achieving value for money. It is proposed that the public value of using PPPs is driven by a number of factors, including the realization of private-sector led innovation through the PPP procurement process; ensuring appropriate construction and project maintenance over a long-term operating period by only paying for performance; and perhaps most significantly, transferring project risks from the public to the private sector partner.
To date, Canadian PPPs have focused primarily on transferring construction and asset availability risks to the private sector, in an attempt to stem the trend of infrastructure mega-projects being plagued by endemic cost overruns and delays. Conversely, Canadian governments have commonly retained demand and revenue risks. By retaining demand and revenue risk, Canadian governments have been able to focus on integrating PPP infrastructure into the wider community, and reduce a common source of tension between the partners on PPPs internationally.
Any cautionary notes re: PPPs?
Despite the identified strengths with Canadian PPPs, there do remain some outstanding questions regarding their overall merits. Of particular interest is whether PPPs actually do deliver value for money as compared to traditional project delivery and government financing? In one study I conducted with graduate student Naeem Farooqi, we found that PPPs have higher base delivery costs, transaction costs, and financing costs than traditionally procured projects. The value of PPPs is driven by the transferring of responsibility for cost overruns, construction delays, and poorly performing facilities from the public to the private sector partner.
However, our study showed that the cost to government of transferring these risks was high, and there was not publicly available data to substantiate whether the size of the premium being paid was appropriate. Other outstanding issues with PPPs are whether concession contracts that can last anywhere from 25-99 years are sufficiently flexible to permit shifts in public policy in response to changing conditions over time, whether the need for commercial confidentiality as part of PPP procurement undermines meaningful community engagement in decision making, and whether the PPP process supports the delivery of public infrastructure facilities that have outstanding rather than average architecture and design.